希悅爾 (SEE) 2010 Q2 法說會逐字稿

Good morning. I would like to welcome everyone to the Diversey Inc. and Diversey Holdings Inc. 2010 second quarter investor conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to hand the call over to Mr. Norm Clubb, Executive Vice President and Chief Financial Officer of Diversey.

Thank you and good morning. This is Norman Clubb, I am Executive Vice President and Chief Financial Officer of Diversey, and thank you all for participating in this call today. I'm accompanied by Ed Lonergan, our President and CEO. Also joining us on the call today are Lori Marin, our VP and Treasurer, and Todd Herndon, whose the Vice President and Corporate Controller of the Company.

Today's discussion covers the second quarter and the first six months of 2010. In a moment, Ed will provide an overview of our performance and continued momentum during the second quarter. But first let me provide some important information on our financial disclosure. On this call we intend to provide an update on the general status of the business and the financial results for three and six month periods ended July 2, 2010, an overview of the balance sheet at July 2, 2010 and an update on the results for Diversey Holdings.

Some of the statements will be made in this presentation are not historical facts and are forward-looking. These forward-looking statements are subject to risks and uncertainties, some which are beyond our control. Please refer to the risk factors and cautionary statement concerning forward-looking statements in our Form 10-Q and Form 10-K reports and as force filed in connection with our notes exchange offer for certain risks and uncertainties we face.

The discussion today includes references to EBITDA for various periods. EBITDA is a nonGAAP measure within the meaning of the SEC's Regulation G. In accordance with Regulation G, our Form 10-Q reports includes a reconciliation of EBITDA for the second quarter and first six months of 2010 to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to EBITDA. Except for comments regarding EBITDA, net income and cash flow, or where specifically indicated, today's discussion reflects the results of continuing operations excluding the divested DuBois Chemical and Polymer businesses, which are accounted for as discontinued operations in our financial statement.

Our Form 10-Q reports for Diversey and Diversey Holdings were filed with the Securities and Exchange Commission on August 12, 2010. They are also posted on our website at diversey.com and can be accessed by clicking on the Investors link at the top of the page and looking under the public reporting section. Filings for both Diversey and Diversey Holdings are available for viewing.

Diversey Holdings is a holding company whose main asset is it shares of Diversey. The main difference between the results of Diversey Holdings and Diversey are net interest expense and the provision for income taxes. We will address the results of both Companies on this call. I've would now like to turn the call over to Ed for a general business update.

Thanks, Norm and good morning, everybody. Today I'd like to provide a brief overview of our second quarter results and turn it back to Norm for a more detailed review.

Diversey's second quarter was a continuance of what we've experienced since the middle of 2009. Macro economic stress in the key developed markets of Western Europe, North America and Japan is pressuring end-user consumption of our products. Emerging markets have returned to growth across the world however and are fully offsetting the consumption challenges of developed markets.

Our overall net sales grew in the quarter increasing by 0.4% over the same period in 2009 after currency adjustments. By region this represented 0.3% growth in Europe, Middle East and Africa, flat sales in Americas and 3% growth in our greater Asia-Pacific region. Each of our regions is experiencing the dynamic of little growth in developed markets offset by a return to growth in emerging markets. In greater Asia-Pacific for example, India and China are both delivering strong year-on-year results, more than offsetting sluggish growth we're seeing in Japan, although our customer base there remains stable.

An example of the developed market consumption pressures is the unique situation in the US public education market. We've all heard the reports of budget strains at American K-12 schools. Their estimates that more than 100,000 teachers may be laid off before school opens later this month. Diversey has historically had strong market presence in floor care in US schools, but as you can imagine if the school is deciding whether to strip and refinish it's floors or retain a teacher, the floors will probably go another year before being refinished.

We're leveraging our trail blazer system in educational facilities which offers as much as a 90% labor reduction in wax application to build share in the difficult market place. We don't believe this particular consumption decline is permanent but it will take some time to work itself out.

Another factor impacting year-over-year sales growth is the one-year anniversary of the H1N1 pandemic. Last year there was strong demand for hand care cleaning and disinfection products as a result of H1N1. The peak demand was in the second quarter in North America and in the third quarter in Europe. As evidenced by numerous announcements from players in our industry, consumer habits in hand sanitizing have not changed, and much of the H1N1 sanitizer growth in 2009 is proving to be a one-time event.

On the positive front we do see floor care equipment sales and service returning to growth with strong double-digit gains in our key markets of Europe and Asia. While many customers deferred replacing equipment in late 2008 and 2009 we've seen increased purchases in 2010 as customers replace older equipment. Our recent innovation launches in both machines and utensils in 2009 and 2010 positions us well to gain from the shift.

We're also offsetting macro economic pressures through effective pricing and customer retention and acquisition activities. We continue to see strong customer response to our unique insight-driven solutions, a benefit of the investment we made in market research over the last several years.

While sales gains remain modest overall, gross profit margin show strong improvement and expenses are under tight control resulting in another quarter of solid EBITDA delivery. Our gross margins improved by 230 basis points to 43.4%. This improvement was driven by successful price increases, favorable product and customer mix and reduced costs for certain key raw materials. In addition, our margins are benefiting from restructuring actions and successful raw material purchasing strategies.

We continued our vigilance on overhead costs to ensure our margin improvements dropped to the bottom line. Operating expenses declined from 34% of sales in the same period last year to 33.9% this year. And we've achieved this result while investing in the quality of our customer pacing team as well as innovations to drive operational improvements in our customers facilities.

Our margin performance and cost controls resulted in an EBITDA gain of $7 million over the same period last year, an 8% improvement, to $93.1 million. Our net income grew by $2 million in the quarter to $20.8 million, one of the best second quarter results in the Company's history.

In summary, we continue to be encouraged by how customers are responding to our solutions. In addition, our strong presence in emerging markets is fueling our growth. We're delivering strong bottom line results and believe we are well poised to accelerated growth in the larger developed markets show a stronger recovery. Now I'll ask Norm to share some more details, financial information followed by some Q&A.

Thanks, Ed. I would like to mind you that a reconciliation of EBITDA to net cash provided by operating activities can be found in our Form 10-Q reports for the three and six-month periods ended July 2, 2010, which can be accessed from our website. Net sales for the quarter, for the second quarter of 2010 were $794.3 million as compared to $792.5 million in the prior period. Excluding the impact of foreign currency exchange rates, our net sales increased by 0.4% despite continued challenging economic conditions in the developed markets of Western Europe, North America and Japan.

While the global economic environment continues to be difficult, the Company realized an increase of sales in Europe, effectively flat sales in the Americas and consecutive quarters of sales growth in greater Asia-Pacific. Our sales performance has been driven by the consistent application of successful pricing strategies, improved customer contract compliance and customer acquisitions. In particular, in both emerging markets and equipment sales, we have achieved a stable growth trend since the beginning of fiscal 2010. We continue to believe that our differentiated value proposition complemented by our diversified customer base has allowed us to effectively execute our sales strategies and should help mitigate continued market uncertainty.

For the six-month period ended July 2, 2010, net sales decreased by 0.3% compared to the first six months of 2009, primarily a result of one less selling day in the fiscal semester compared to the same period last year and also reflecting the current challenging global economic conditions. Ed provided a summary of the overall trends impacting our sales for the quarter and let me provide some highlights for the performance of our regional businesses during that quarter.

In our Europe, Middle East and Africa markets net sales increased by 0.3% in the second quarter of 2010 versus the same period last year. While we continue to experience favorable increases in emerging markets and in equipment sales, primarily in the building managers and service contractors sector, the stagnant economic conditions have presented challenges. We experienced lower volumes in Western Europe, particularly in the lodging and food service sectors, that were substantially offset by pricing and new customer acquisitions. In the food and beverage sector we experienced growth in formulated chemicals offset by the strategic exit of lower margin commodity sales and the decline in consumption levels in the beverage market.

In our Americas region, net sales decreased by 0.1% in the second quarter of 2010 versus the same period last year. Key emerging markets continue to achieve sales growth during the quarter compared to the same period last year. This offset lower sales in the United States and Canada largely due to the significant impact of H1N1 virus-related sales in the comparable period last year. We expect continued consumption growth in emerging markets to be partially offset by ongoing softness and economic uncertainty in many sectors of the North American market place.

In our greater Asia-Pacific region, net sales improved by 3% in the second quarter of 2010 versus the same period last year. Growth in this region is led by China and India which experienced strong volume improvements across sectors and to the expanding economies reflect strengthening consumer demand. In these markets we experienced sales growth in the food and beverage sector due to customer acquisitions while favorable occupancy rates helped sustain growth in the lodging sector. Equipment sales across various customer sectors continue to show favorable increases.

Our growth trends in emerging markets are offset by volume declines in Japan ,consistent with certain other developed markets, and the strategic shift away from commodity-based sales in our Japanese food and beverage sector. The region expects continued sales growth through it's economic recovery in consumer demand at their stores and as we continue our focus on key customer acquisitions and on emerging markets.

Now looking at overall financial performance. Our gross profit percentage improved by 230 basis points from the second quarter of 2010 versus the same period last year and by 320 basis points for the first half of 2010 as compared to the same period last year. The improvement was largely the result of successful implementation of price increases, improvements in product and customer mix and a favorable reduction in certain raw material cost including phosphorus materials, caustic soda and chelates.

In addition, margins were enhanced through successful implementation of our restructuring program along with structural improvements built into our global sourcing activities. This included increasing the efficiency of our material purchasing, improving our manufacturing logistics footprint, rationalizing a number of product offerings, eliminating low margin products and implementing internal processes to more effectively monitor customer profitability.

Selling, general and administrative expenses as a percentage of net sales were 32% for the second quarter of 2010 and 31% for the same period last year. Excluding the impact of foreign currency, selling, general and administrative expenses increased by $9.8 million during the second quarter of 2010 compared to the same period in the prior year and increased by $8.2 million during the first six months of 2010 as compared to the prior year period. This increase is primarily due to $9 million of charges related to our decisions to move certain accounting functions to a third-party provider, relocation of the Waxdale Manufacturing capability, and pension settlement losses and curtailment costs.

EBITDA in the second quarter of 2010 was $93.1 million compared to $86.1 million in the second quarter of 2009. Net of a negligible foreign currency impact, EBITDA improved by $7 million in the quarter. Net of foreign currency impact, EBITDA for the first six months of 2010 increased by $36.4 million as compared to the prior period-- to the prior year to $168.7 million. This was primarily due to increased gross profits arising from pricing actions, a favorable reduction in certain raw material costs, and cost savings from successful implementation of our restructuring program and offset by an increase in selling, general and administrative expenses primarily due to employee termination costs from implementing operational efficiency activities as previously referenced.

The Company reported net income of $20.8 million for the second quarter of 2010, a $2 million improvement over the prior year period. Net income increased by $18.7 million in the first six months of 2010 to $20.9 million. This improvement was primarily due to increased EBITDA partially offset by increases in interest and income tax expense.

Diversey Holdings reported net income of $11.7 million in the second quarter of 2010, an improvement of $4.9 million in the second quarter of 2009. Net income of $5.6 million for the first half of 2010 represents an improvement of $27.4 million in the first half of 2009. As previously mentioned, the main differences between the results of Diversey Holdings and Diversey are net interest expense and the provision for income taxes.

Capital expenditures in the first six months of 2010 were $36.2 million compared to $39.1 million in the first six months of 2009. As of July 2, 2010 Diversey Inc. had total indebtedness of approximately $1.36 billion, consisting of $400 million of senior notes, $913 million of borrowings under our senior secured credit facility, $16 million in borrowings under our accounts receivable securitization facilities and $28 million in other short-term borrowings. We held cash and cash equivalents of $171 million as compared to $249 million at December 31, 2009.

Working capital increased by $106 million during the six months ended July 2, 2010. This increase resulted primarily from a decrease of $99 million in accounts payable, a $13 million increase in inventories offset by a decrease of $5.6 million in accounts receivable. We continue to effectively manage our receivables collection programs and at being successful in reducing days outstanding, which have led to the decrease in accounts receivable. The increase in inventories is a result of seasonal builds in inventory levels. The decrease in accounts payable is a result of taking advantage of negotiated discounts with vendors as part of our global strategic sourcing initiative. The benefit of these prompt payment discounts has contributed to the improvement in our gross margins.

Diversey Holdings consolidated debt balance at July 2, 2010 was $1.6 billion which includes Diversey Holdings $262 million senior notes including the accretion of $12 million of interest in May. Given our stable debt structure, strong liquidity and cash flow profile, we have elected to pay cash interest on the Holdings 10.5% notes on November 15 of this year. We will continue to evaluate whether we pay interest on this, our more excessive piece of debt, taking into consideration our liquidity and cash flow needs, potential alternative investment options and restrictions within our credit agreement and indentures.

As of July 2, 2010 the Company had total credit availability of $245 million under our revolving credit facility. Of the total credit available at the end of the year, we could borrow this full amount and still be in compliance with our financial covenants.

This concludes our presentation. I'd like to remind you we have an Investor Section on our Corporate website diversey.com. We consider this website to be a key communication tool with the investment community and we encourage you to periodically access the site. Documents related to the Diversey and Diversey Holdings senior notes as well as both Company's financial results can also be found on the Investors Section of our Corporate website.

A recording of this conference call will be available for replay for the next two weeks on the Investor Section of the Company website at diversey.com. Please direct questions related to our financial results to Lori Marin. John Matthews is the contact for all non-financial matters. Our contact information can be found in the Investors Section of our Corporate website. And we will now move on to the question-and answer section of the call.

(Operator Instructions) We will now take a question from Tom Harkrider from Goldman Sachs. Tom, please go ahead.

Yes, it's Todd. But congratulations on the good quarter.

Thanks.

Guess to start it off, since the time of your recap you've already increased EBITDA margins by 200 basis point but you still haven't closed the 600 basis point gap between you and your largest competitor. Is that still a goal or since you're executing well, that's all that really matters? And then how do you think about the 14% EBITDA margins or better, do you think that's sustainable? Thanks.

This is Norm. First of all the-- we don't directly compare ourselves to equal out in terms of our performance. We are-- we have programs within the business to significantly increase the overall EBITDA margin going forward, that has been the intent of the restructuring programs that we have had. And we are continuing to see a strong improvements in profitability as we go forward. The 14% margin we believe to be a sustainable level for us and we do not see that there's any particular pressure at this point for us to move away from sort of that level of profitability and that the ongoing restructuring we had within the business, which much of which will continue throughout 2010 as we bring the (inaudible) programs to conclusion, we'll continue to assist our improvements in profitability.

That sounds good. And can you bridge the gap in EBITDA improvement? Was the pricing the biggest factor, lower materials or productivity and skew rationalization initiatives? Any color there would be helpful.

We don't generally disclose the components of that. I'm sorry.

Okay, and then in regards to the emerging markets that continuing to be strong, and I guess I'll just rattle off a couple for times sake but Nestle's talk about the $300 million plus investment in Brazil over the next five years, Wal-Mart's talked about opening 100 stores in Brazil this year alone and Pepsi said they have permission from the Chinese Government to open up like ten new plants there. Is it fair to say that most of that business will go to you or your largest competitor?

Well I-- this is Ed. I think in our industry we've said all along between 70% and 80% of the total business is not us or our largest competitors, so there is still significant fragmentation in that marketplace. That said I would say the two global players in this space have a competitive advantage in talking to global customers about globally consistent solutions. So as we look at our growth in places like Brazil, India, China, Russia, certainly international players in food, beverage, lodging, food service feel a significant portion of that growth.

Right, but it-- so there is still a lot of business from the international players for you and your largest competitor to win overseas?

We obviously work closely with our partners. We identify about 200 global players that-- across our sectors where we see significant investment over time in expanding their footprints and we work closely with them to ensure we understand where they're building and when and ensure we're at a table when they're talking about who supplies them.

I appreciate it. Thanks for answering the questions, and good luck for the rest of the year.

Thanks.

Thanks.

There are no further questions at this time.

It's Friday in August.

Well we'll give it another few seconds, see whether any more questions come forward. Well if there are no other questions, on behalf of everyone at Diversey I hope you do enjoy your summer weekend which I'm sure has contributed to the lack of questions right now. But on behalf of everyone here at Diversey and Diversey Holdings, we'd like to thank you for attending this conference call and for your continued support of our Companies. Thank you very much.